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Friday, July 22, 2011

A Long Summer Ahead

At least for the moment, it looks like Greece and the eurozone have taken a step back from the brink. Markets initially reacted well to the outcome of a summit, although this early optimism seems to be fading. Once again, the Franco-German axis played a key role, given that the other 15 eurozone countries substantially rallied around the 'common position' agreed by French President Nicolas Sarkozy and German Chancellor Angela Merkel in Berlin the day before the summit.

However, the political reaction from within both France and Germany doesn't exactly sound enthusiastic. In France (we would say partly due to the imminent presidential elections), the Socialist party has been particularly vocal in its criticism of the deal struck yesterday in Brussels.

François Hollande, one of the French Socialist Party's potential candidates to the French Presidency,said,

It was a necessary agreement but it was belated and insufficient. Belated, because if these measures had been taken 18 months ago, there would never have been a eurozone crisis…Insufficient because there is no European agency that was created to borrow.

In other words, not only does Hollande support Eurobonds, but he would also be happy with a specific agency created to issue them.

Martine Aubry, another potential Socialist candidate, wrote on her website,

"The heart of the problem is nevertheless still there: building a government for the euro."

“We took some decisions hastily that will help relieve the Greek government and we hope its people. But this plan will not be enough.”

Hence, the message from French opposition parties is clear (with the potentially important exception of Marine Le Pen): full steam ahead with fiscal union. It will be very interesting to see how this plays out if, say, the Socialist Party wins next year's presidential elections and has to make a new deal with Germany.

The situation in Germany is a bit more complex. Predictably, Chancellor Merkel was criticised by the opposition Social-Democratic Party (SPD), with Chairman Sigmar Gabriel saying,

"What has been decided…only means that we're giving [Greece] more loans. But it won't change anything to the fact that the Greeks are not able to carry this gigantic mountain of debt."

Not clear what he suggests as an alternative, but the SPD has so far tended to be supportive of greater integration.

However, the deal was also criticised from Merkel's junior coalition party, the FDP. German Economy Minister Phillip Rösler, a prominent FDP member, warned,

"Without overcoming the Greek economy’s lack of competitiveness, there can’t be a sustainable solution."

But the FDP's economic expert Frank Schäffler, a relaibly vocal critic of the current bailouts, was much tougher in his assessment. He said,

"Without the possibility to leave the euro, the debt cut makes no sense. Greece will continue to be dependent on other countries...Furthermore, the plan contradicts the Bundestag decision from February, which states that no debt buy-back programmes will be financed."

Crucially, Schäffler and his colleague Klaus-Peter Willsch (from Merkel's own CDU party) have demanded that German MPs return from summer recess and hold a special session to discuss the Greek deal in the Bundestag. They maintain that Chancellor Merkel overstepped the negotiating mandate received from German MPs, since she agreed to give the EFSF the power to buy eurozone debt n the secondary markets.

Hence, despite the show of unity and determination in Brussels, both Merkel and Sarkozy will have to face strong domestic opposition to the deal struck yesterday, although for different reasons.

There's still a lot of work to do before the summer holidays are over...